Both wire transfers and direct deposits allow the convenient transfer of funds from an originator to a beneficiary. A wire transfer is a premium service, often associated with a fee. A direct deposit, also known as ACH -- the acronym stands for automated clearing house -- is a less personalized, somewhat slower service usually provided without charge. Each transfer method has specific advantages and disadvantages.
What Happens When You Make a Wire Transfer
Money transmitted by means of a wire transfer generally goes through one of three intermediaries -- the Federal Reserve Wire Network, the Clearing House Interbank Payments System or the Society for Worldwide Interbank Financial Telecommunication, also called SWIFT. In most cases, a wire transfer initiated anywhere in the world will be completed within 24 hours, Saturdays and Sundays excluded. If the transfer is initiated early in a business day, it will often be completed that afternoon, sometimes within the hour.
What Happens When You Make a Direct Deposit
Although the name "direct deposit" suggests that the process requires no intermediary, all direct deposit transactions flow through an automatic clearing house. In the United States, two of these intermediaries dominate the business: the FedACH and the Electronic Payments Network, or EPN.
ACH transactions are generally slower than wire transfers, because they are processed in batches. In most cases, a direct deposit will not reach the beneficiary account until at least the day after it originates. Although originally ACH processing only occurred on business days, some of the smaller U.S. ACH houses, such as ACHWorks, now offer limited access on weekends.
Costs of Each
In most cases, the sender of a wire transfer pays a transaction fee, which ranges from $15 to $25. Some banks and a few credit card companies, such as American Express, waive the fee for valued customers -- those holding premium credit cards or meeting account balance requirements.
Almost all ACH direct deposit transactions originating with an institution -- such as a Social Security or pension payment -- are cost free to the individual beneficiary. ACH transactions that you designate -- such as a recurring car payment -- are also almost always cost free.
Other ACH payments have a modest cost. Some -- such as a debit card transaction -- cost the individual nothing but carry a transaction fee paid by an institution, such as your supermarket. At times, some institutions -- discount gas stations, for example -- charge a small transaction fee to the customer.
Advantages and Disadvantages
The basic advantage of a wire transfer over a ACH transaction is speed; the basic disadvantage is cost. Both offer transaction conveniences to individuals and institutions. The banking system in the 21st century is especially dependent upon the 22 billion ACH transactions that move $39 trillion each year.
An increasing problem for both institutions and individuals, however, is the vulnerability of the banking system to electronic fraud. Fraud related to ACH transactions accounted for about $100 million in 2009. In February 2015, the "New York Times" reported hundreds of millions of dollars -- and possibly as much as $1 billion -- in fraudulent ACH transfers and withdrawals by a single group of fraudsters over a period of just a few months.
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I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.